Paired Trade: Buy Dorman Products, Sell O'Reilly Automotive

This is the 9th in a series of ideas where I contrast a cheap security with an expensive one that otherwise shares some characteristics. So far, I am 6 for 8:

		BUY	SELL
		MPR	NLC
13-Mar		7.30	11.99
28-Aug		9.78	17.52
		34.0%	46.1%	-6.1%
		JNJ	AGN
17-Apr		53.05	49.49
28-Aug		60.29	55.10
		13.6%	11.3%	1.2%
		COLM	UA
1-May		30.36	24.00
28-Aug		39.94	24.30
		31.6%	1.3%	15.2%
		BCR	ISRG
8-May		73.52	158.77
28-Aug		80.31	224.90
		9.2%	41.7%	-16.2%
		EZPW	AAN
5-Jun		13.09	32.85
28-Aug		13.46	26.64
		2.8%	-18.9%	10.9%
		SCVL	PSS
19-Jun		12.04	14.38
28-Aug		16.21	15.84
		34.6%	10.2%	12.2%
		HRL	DIN
9-Jul		34.09	31.80
28-Aug		36.89	21.91
		8.2%	-31.1%	19.7%
		AKAM	NTAP
14-Aug		18.01	23.59
28-Aug		18.11	23.32
		0.6%	-1.1%	0.8%
			Average:	4.7%

For reference:

• 3/14: Buy Met-Pro (MPR), Sell Nalco Holding (NLC)
• 4/18: Buy Johnson & Johnson (JNJ), Sell Allergan (AGN)
• 5/3: Buy Columbia Sportswear (COLM), Sell UnderArmour (UA)
• 5/10: Buy C.R. Bard (BCR), Sell Intuitive Surgical (ISRG)
• 6/6: Buy EZCORP (EZPW), Sell Aaron's Rents (RNT)
• 6/20: Buy Shoe Carnival (SCVL), Sell Collective Brands (PSS)
• 7/9: Buy Hormel (HRL), Sell DineEquity (DIN)
• 8/15: Buy Akamai (AKAM), Sell NetApp (NTAP)

Today's trade idea involves two companies that are both in my watchlist. I wrote positively about O'Reilly (ORLY) last year, but it has almost doubled since then as the thesis has played out. I wrote about Dorman Products (DORM), a major supplier to ORLY and other auto parts retailers, in February and then again in May. It had a huge run, and I sold the position. I added it back very recently in my Top 20 Model Portfolio and continue to like it here. Let's go to the tape:

I probably shouldn't pick too much on ORLY, as I believe it was hit along with peers on the Cash for Clunkers program that took a small amount of potential customers off the road. I had been concerned that DORM was getting squeezed by its customers, but the last two reports tell me that pressure is abating. If ORLY works, DORM should work a lot better. DORM has a similar growth profile, a superior financial structure and a much lower valuation. My analysis doesn't include the off-balance sheet lease exposure of ORLY either.

Disclosure: Long DORM in a portfolio I manage

Comments

[Jeff Andry:]

Great article. Very unique analysis. I really like the Liabilities/CA for DORM. But I do think it will test that 13.50 level or lower again before it makes the move back up.

Aug 30 12:02 PM

[Alan Brochs...:]

Thanks, Jeff. I have been interested in the high 13s/low 14s - it could definitely test a bit lower. The Top 20 Model Portfolio bought it in two pieces - 13.78 on 8/11 and initially at 13.48 on 8/6. Our fills are always the next day average price, so it's always a bit out of my hands compared to the real world (where you get filled when you make the decision). I didn't include my "target" on a DORM long, but I believe that it can reach 18 over the next year. Clearly, it could reach it sooner too!

Aug 30 02:14 PM

[Shnayor:]

What about Dorman's account receivable growth, which is where all the sales growth is landing?
Isn't that a concern?

Aug 30 07:38 PM